About The Author:
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.
FERC's 2004 Guidelines
by Roger Feldman -- Bingham, Dana L.L.P.
(originally published by PMA OnLine
It really has been an
extraordinary year for the power industry. They say if you do not learn from
history, you are doomed to repeat it. So FERC has decided to issue new
Guidelines, to respond to what we all have learned.
First, a special task
force identified what that was.
It has been a year of
drawing a new profile around the negative space to be perceived where
substance had been forecast to exist:
The lights went out
in an extraordinary blackout, highlighting the frailties of the grid.
The Energy Act failed
(for now) to pass, highlighting the perceived ability of the U.S. to make
do if need be with the status quo and higher imports.
The implosion of the
merchant plant bubble did not (yet) lead to multiple bankruptcies of
foreclosures on assets or the collapse of the refinancing debt ledge.
revolution did not crest with the introduction of SMD and the shaping up
of the system through behavior codes.
The world did not
turn sustainably greener through carbon trading of the displacement of
coal. Maybe Putin owns shares . . .
incentives for receivables lapsed and the political drive to green flagged
It has been a year when, moving with less fanfare, but with tangible
solidity, the discernible profile of major future trends took form.
attractiveness of rate based regulations relative to the merchant model,
dependent on uncertain markets became apparent, particularly as fuel
prices volatility became apparent.
The overhang of gas
priced capacity in many parts of the country assumed seemingly glacial
form, with increasing doubt that economic thaw could bring its melt in
Great pools of equity
were assembled which have yet to be expended on the bargain sales of yet
to be uncovered distressed plants.
Consolidation of the
competitive positions of the largest utilities slowed, but the long term
importance of balance sheet size (particularly once PUHCA repeal is
completed) became increasingly clear.
loosening of environmental standards for existing coal fired generation
pointed toward a greater stability in the existing plant fleet, and a
greater interest in the lower fluctuating fuel alternative.
The Enron taint of
fraud or financial weakness hovered over the first wave of power marketers
lingered, while well capitalized financial institutions supplanted high
flying trader developers.
FERC promulgated more
and more standards of good behavior and rotections against abuse of
size and power, as the national work of locking barn doors past horse
departure flooded over energy companies of all types.
“to-be-mothballed” nukes showed new baseload kick as well.
The Task Force concluded that it was hard to know what this all means.
Specifically, it remarked as follows:
“The paradox of energy
industry forecasts, based on trends remarked, is that while the underlying
realities change slowly, and it takes a long time physically to build
assets, perceptions and related markets can change much more quickly. Just
when we have long forgotten the hulls of coal gasification plants and slurry
pipelines and LNG terminals, the bidding for non-existent turbine capacity
and hockey stick power price projects for CTs. Things have a way of
changing, because hard as quantitative analysis is, it has a way of being
swept aside by the sensitive response of markets and the confounding effect
The New Guidelines
Which is why, as we greet 2004, we should be grateful that FERC has
published its new Energy Policy Guidelines, striking directly at the
affiliate issues so long dogging deregulation. Henceforth, for a rate to be
It must be fully
disclosed and determined to be prudent by the appropriate TBD] regulatory
body before its costs can be passed through.
It is only available
to regulated utilities whose regulated vs. deregulated VAR meets certain
ratio tests (definition to be published for comment by FERC next year).
To provide marginal
price parity among generators, all prices will be indexed to a basket of
natural gas future prices, predetermined quarterly (the process to be
known as “ratings sweeps.”)
If a facility
receives “green tags” associated with solar collectors, it may receive
PURPA rates, but they must be market capped. Otherwise, the question is
left for rehearing.
So at this special time
of year: we thank Congress for leaving FERC to plan, and FERC for the
guidance it has now provided us.
ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.